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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Physical Oil Markets Don’t Lie – Is Another Crash Likely?

OPEC oil

Oil prices are falling and analysts and market players are as eager as ever to explain the decline in accordance with their own bullish or bearish leanings. It’s a natural correction that was only to be expected after the buildup of long bets on crude oil and oil product futures, the bulls insist. It’s the start of a trend, thanks to the major jump in U.S. production, the bears counter. Now, data from physical oil markets has surfaced that supports the bears’ stance.

North Sea Forties, Russian Urals, WTI, and Atlantic diesel have all fallen to their lowest in several months, Reuters reports, citing commodity traders and analysts. These are physical markets — the markets where actual oil is taken from one place and shipped to another to be refined into fuel and other products, as opposed to the speculative futures market. If the physical market points down, chances are the price drop — 15 percent in three weeks — is not just a blip, as OPEC’s Secretary General Mohammed Barkindo said earlier this week.

Interestingly enough, Barkindo also said he had Russian President Vladimir Putin’s word that Russia will not flood the market with oil while the cut deal still holds. The reason this statement is interesting is that it is the latest example of OPEC’s tendency towards upbeat comments that have little substance, unlike the physical oil market data.

RBC Capital Markets’ Michael Tran told Reuters that, “Physical markets do not lie. If regional areas of oversupply cannot find pockets of demand, prices will decline. Atlantic Basin crudes are the barometer for the health of the global oil market since the region is the first to reflect looser fundamentals. Struggling North Sea physical crudes like Brent, Forties, and Ekofisk suggest that barrels are having difficulty finding buyers.” Related: U.S. Mandates Biggest Non-Emergency Strategic Oil Selloff

This is bad news and it comes amid increasingly bearish production projections from the Energy Information Administration and a warning from the International Energy Agency that another oversupply is not out of the question this year. The global oil market could slip into deeper oversupply on the back of non-OPEC production growth led by the United States, the authority said in its latest Oil Market Report.

“The main factor is U.S. oil production,” the IEA said. “In just three months to November, crude output increased by a colossal 846 kb/d, and will soon overtake that of Saudi Arabia. By the end of this year, it might also overtake Russia to become the global leader.”

The Energy Information Administration has reported two consecutive weekly crude oil inventory builds after more than two months of declines. Oil production grew from 9.49 million bpd for the week to January 5 to 10.25 million bpd in the week to February 2. The United States is experiencing a second shale revolution that could put the first one to shame thanks to the previous oil price collapse that motivated stricter financial discipline and a focus on efficiency improvements.

The U.S. is already producing the same as or even more than Saudi Arabia. The upbeat global economy projections of various authorities are still only that, projections, and the market is treating them with caution as everyone watches the U.S. shale patch.

This caution adds to the fact that supply may not be matching demand: Forties’ differentials to dated Brent have fallen to a negative $0.70 from a premium of $0.75 at the start of 2018. Urals trades at a discount of $2.15 to dated Brent in the Mediterranean, the lowest since September 2016. To top it all, demand for key fuels such as diesel and heating oil is unusually weak. The physical market’s needle is pointing to bear, for now.

By Irina Slav for Oilprice.com

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  • Mark Battey on February 14 2018 said:
    It's a game that will be won by those not playing.
    It's hard to believe the Saudis and Russians will continue their efforts to support prices by pumping less, if it's not working and prices fall from overproduction, unless I guess Trump has them in some deal we don't know about.
    Of course, only the consumer wins the inevitable price wars and only the lowest cost producers survive.
  • Tim Turley on February 15 2018 said:
    Oil has gone up about 3% since this article was probably being finalized for publishing a couple of days ago... so much for the correlation of short term physical inventory to price... there's a lot more to it than that, that it's not even funny.... such as short interest, seasonal draws, refinery maintenance, WW demand increases, the USD, and Venezuela outages.
  • petergrt on February 15 2018 said:
    Great article.

    The 1.5+ billion barrel stockpile amassed by speculators is about to head for the exit . . . . .

    I am adding to my short positions.
  • John Brown on February 15 2018 said:
    Ah, Reality. Nobody in the oil industry likes to discuss that because that means lower oil prices. OPEC/Russia idled millions of barrels a day to reduce the glut in oil sloshing around the world, and they did reduce the glut. Reduce, not eliminate. First they got the price up over $50 for WTI, which was where they should have styed. That firmed up the price, allowed U.S. producers to make money, but without providing a massive incentive to ramp up production at a record pace. However, everybody got GREEDY. If they could talk WTI up to over $50 even $55, why not $60 or $65, even with a glut of oil still out there. So that's what they started to do. Not out of what was smart for the medium or long term price of oil, but for GREED. Then you get Goldman Sachs which makes more money when the price of oil is higher coming out with forecast of $82 a barrel oil in 6 months, and we were off to the races.
    So of course U.S. producers turned on the spigot, and while Saudi Arabia was tired of hearing about U.S. production and everybody was low balling it U.S. production was doing what it always does when prices are artificially high and they can make billions, it was taking off.
    So more and more production has been idled the price of WTI went over $65, and Brent over $70, and GREED and Speculation ran rampant, and guess what? There is still a glut if a reduced glut of oil in the market, and U.S. production is going to hit 11 million by mid-year, and if prices stayed high 12 million plus next year, and now reality is sinking into the market. There is lots of oil out there and supply is growing faster than demand. Its Amazing that the industry ignores the fact that the cost of producing oil in the USA continues to drop, and the speed of getting it to market is now months not years. It will be interesting to see what OPEC/Russia do now, and Goldman Sachs to firm up and talk up the price. Greed is still in control, Fear has yet to kick in, and everyone still wants $80 plus oil. So this will be interesting.

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